Home seller discounts can include more than just price drops

As the seller’s market wanes, negotiations can include mortgage-rate buydowns, seller financing and repair credits.

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | July 23, 2022

Scott Weber and his real estate agent had a focused and disciplined strategy for finding his family a good deal in the city of La Verne.

All hands-on deck. Scour the market for homes matching his family’s wants and needs. Only make offers on properties sitting on the market for at least 30 days. Make low offers.

Just four short offers later, Weber was under contract on a very nice home for $1,050,000.

My eyes were popping when the appraisal came back at $1,200,000. I thought I misread the report. I can’t recall the last time I had a client underpay by 12.5%.

Just like that, Weber starts out $150,000 ahead.

“Sellers don’t want to admit it’s a buyers’ market,” said Weber. “Some sellers were offended (when) we didn’t overbid.”

It’s been an insatiable sellers’ market for a good three years. Not anymore.

On Wednesday, July 20, the Mortgage Bankers Association reported its lowest level of mortgage loan applications in 22 years.

“Purchase activity declined for both conventional and government loans, as the weakening economic outlook, high inflation and persistent affordability challenges are impacting buyer demand,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting.

If you are on the hunt for your dream home, a second home or an investment property, consider the broader menu of seller concessions — not just sales price.

Think big. Ask for a lot. Sellers can just say yes, no or monkey in the middle.

For example, consider a permanent rate buydown. Assume you can get a 30-year fixed rate at 5.5% without points. The principal and interest payment would be $3,407 on a $600,000 loan. At 4.875%, the payment would be $3,175, or more affordable by $232 per month.

This concession would cost the seller roughly 2% of the loan amount, or $12,000. But it could potentially save the buyer $83,520 over the life of the loan.

Homebuilders are especially open to a cornucopia of concessions if it doesn’t mean discounting the sale price. They want their closed sales comps to remain steady to make sure discounts don’t torpedo pricing for an entire phase of freshly built homes.

Always shop around and compare any builder credits with outside vendors like flooring and mortgage companies. To my knowledge, a builder’s ancillary goods and service providers tend to have inflated prices. Can you say profit center?

Freddie Mac allows “interested party contributions” of up to 3% of the sales price for home buyers making down payments of less than 10%. Such “IPC’s” include home seller, builder and real estate agent concessions. Freddie also allows up to 6% in IPC concessions for loans with 10-25% down, and up to 9% for buyers putting more than 25% down.

Freddie allows a maximum 2% IPC for investment properties, regardless of down payment size.

Other potential concessions arise after your home inspection.

For example, the buyer and seller can agree to a seller’s credit for roof and plumbing repairs, which can be completed after escrow closes. Say the cost of repairs totals $15,000. You could convert that into closing cost credits or reduce the sales price by that amount.

Keep in mind the lender will reduce the appraised value by the amount of the repairs if you call it a repair credit. That could potentially affect your down payment or loan pricing.

How about asking the seller to carry back a second “piggyback” mortgage to qualify for a decent-sized home instead of living in a shoebox? This could garner the buyer cheaper payments and avoid mortgage insurance.

“The biggest obstacle for homebuyers is down payment,” said Brad Seibel, head of mortgage at Sage.

Say, for example, a buyer with a 760 middle FICO score and strong job history agrees to put 5% down, or $25,000, on a $500,000 purchase. The seller could agree instead to carry back a second mortgage of 15%, or $75,000, at a monthly interest-only payment of 6%, with a balloon payment due in five years. The seller also would need to agree to pay 1.125 in points to offset added costs for keeping the first loan at 5%.

Assuming the buyer gets a 5.375% rate on a 30-year fixed for the first trust deed, he or she would pay $121 less per month with the so-called piggyback second mortgage for the first five years. It could also mean the difference between qualifying or not.

Seller financing could provide an additional bonus for some home sellers: a capital gains tax delay.

“Seller delays any potential capital gains tax on the $75,000 until the buyer repays the principal balance,” said Jeff Hipshman, CPA partner at Eide Bailly LLP. “Any interest payments from the buyer to the seller are taxable to the seller as ordinary income.”

If you are angling for concessions in addition to getting your best price, collaborate with your mortgage loan originator and your real estate professional — especially if you are focused on a permanent mortgage rate buydown.

Freddie Mac rate news: The 30-year fixed rate averaged 5.54%, 3 basis points higher than last week. The 15-year fixed rate averaged 4.75%, 8 basis points higher than last week.

The Mortgage Bankers Association reported a 6.3% mortgage application drop from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $647,200 loan, last year’s payment was a mind-boggling $1,039 less than this week’s payment of $3,691.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without points: A 30-year FHA at 5%, a 15-year conventional at 4.875%, a 30-year conventional at 5.5%, a 15-year conventional high-balance ($647,201 to $970,800) at 5.25%, a 30-year conventional high-balance at 5.75% and a 30-year purchase jumbo at 5.375%.

Eye catcher loan of the week: A 30-year jumbo purchase mortgage with an interest-only payment for the first five years at 4.875%, without points.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.

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Jeff Lazerson - Mortgage Columnist since 2011